A median-priced home in the U.S. requires a salary of at least $100K. Can a parent buy for a child who’s just starting out?

Becoming a homeowner in today’s real estate market is a challenging goal, particularly for young, first-time buyers. Between limited inventory, steep prices and equally steep mortgage interest rates, the path to homeownership is an expensive one. In fact, to afford a median-priced home ($402,343 as of February 2024), Americans need a six-figure annual income of $110,871, according to Bankrate’s Housing and Income Study.

Given that most young adults are not likely to be earning six figures, that can seem an impossible hurdle to clear. It’s understandable that some financially established parents may want to step in and help make homeownership possible for an adult child just starting their career. But there are a lot of variables to consider first, including potential tax implications. Here’s a closer look at how to buy a house for a child or other family member.

Why a parent might buy a home for their adult child

Most parents want to help their child succeed in any way they can — and purchasing a home for them, if you can afford to, can help them overcome many of life’s hurdles. Today’s housing market is costly and highly competitive, and renting can be just as unaffordable in many markets across the country. This is doubly difficult for a young adult who doesn’t have a very stable income yet.

In Bankrate’s February 2024 Down Payment Survey, more than half of aspiring homeowners (54 percent) said that their incomes were not high enough to afford a down payment and closing costs, and 51 percent said the cost of living was too high. For recent college grads trying to get their foot in the door of homeownership, student loans can also be a heavy burden: 10 percent of aspiring homeowners, including 14 percent of millennials, said student loan debt was holding them back.

As a parent, it’s hard to watch your child struggle financially when you have the means to help. “Buying a home for a family member is something that can be done as a way to give an adult child a head start in life,” says Greg McBride, Bankrate’s chief financial analyst.

Ways to buy a house for a family member

There are many different ways to help a family member buy a home. For example, 14 percent of homeowners said they received a gift from family or friends in order to pay for a down payment and closing costs on their first home, and 9 percent received a loan from family or friends, according to Bankrate’s Down Payment Survey. Here are some of the most common ways to help a child or other family member buy a house:

• Loans: If a parent has the financial resources, they may want to loan their child the cash to buy a home. “Parents can lend money to the child on any terms they choose, with interest or interest-free, and determine payment arrangements and timeline,” says attorney Arash Sadat, a partner with Mills, Sadat, Dowlat LLP in Los Angeles.
• Gifts: A gift can take many forms, including giving your child money to purchase a home with no repayment needed. A gift may also involve the parent buying a home and then gifting the property to the child, rather than gifting the money to buy a property.
• Trusts: A trust is a legal arrangement through which a “parent buys a house in the name of their trust and specifies in their trust that the house will be passed to the child upon their death,” says Sadat.
• Mortgage co-signing: If a child’s income or credit is inadequate to qualify for a mortgage on their own, a parent can co-sign a mortgage with them. “As a co-signer, that means the parent says they’ll be liable in the event the child doesn’t make mortgage payments,” says Sadat.

Things to consider

When buying a home for a child or family member, there are various considerations to sort through, including how the purchase will be structured, title requirements and tax implications.

“Determine whether this is a property that you will own and let them live in, whether it will be shared ownership or whether you will be buying it for them outright,” says McBride. “Each has its own pros and cons and there isn’t a one-size-fits-all answer, so consult with an attorney and an accountant beforehand to make an informed decision that is in accordance with your wishes.”

Title considerations

There are multiple ways a home title can be completed when making a purchase. For instance, the title can be in the parent’s name alone, the child’s name alone or in both their names, says Sadat.

A lender may also have its own requirements regarding how the title is completed. “If both parties are going to be responsible for paying the mortgage, the lender might require both parties to be on the title,” says Sadat. “If both the parent and the child will be listed on the title, the other consideration is whether they will be listed as joint tenants or tenants in common.”

In cases where the parent and child are listed as joint tenants on the home, if one joint tenant dies, the other tenant automatically becomes owner of the home without having to go through the court probate process. “This is the simplest and most cost-effective arrangement for most people,” says Sadat.

When a parent and child are listed as tenants in common, if one owner dies, their share in the home is distributed according to the individual’s trust or will and the remaining share stays with the surviving party. “That means it’s important to have your will or trust in order if you are going this route,” he says.

Tax considerations

There are also tax implications associated with helping a child with a home purchase. Gifting a child either money to purchase a home or the home itself is likely to trigger the federal gift tax.

According to the IRS, “You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return.” In other words, if a parent buys a home for their child as a gift, without expecting to be paid back, the government considers that a taxable event.

Typically, it’s the donor (in this case, the parent) who is responsible for paying the federal gift tax. However, under IRS regulations, it’s also possible to arrange for the donee (in this case, the child) to pay the tax. Parents who gift money or a home to a child are not allowed to deduct the value of the gift from their federal tax returns.

There is a threshold under which the gift tax is not triggered, however. For 2024, the IRS allows annual gifts of up to $18,000 without incurring a tax impact. This exclusion applies to each child a parent gifts money to, meaning you can give each of your children as much as $18,000 without paying a federal gift tax.

Another tax implication to consider is the home mortgage interest tax deduction. This deduction is only available to the individuals whose names are on the mortgage.

Pros and cons of buying a house for your child

Buying a home is a big financial decision, no matter who it’s for. Here are some pros and cons to weigh:

Pros

• Providing your child with a stable place to live
• Giving them a head start to build savings of their own
• Acquiring a valuable investment
• Equity building and tax benefits for the mortgage holder

Cons

• Potential strain on the family relationship
• Potential impact on your finances and credit score
• Liability when co-signing a mortgage
• Gift tax ramifications

FAQs

• Can I buy a house for my child in cash?

  Yes, if you have the financial resources to purchase a home in cash for a child, you can do so, says Sadat. But it’s important to consider whether doing so will put undue strain on your finances, and whether you might get a better return on the cash through other types of investments. Consider your local housing market conditions as well.
  

• Can I buy a house and put it in my child’s name?

  Yes, you can purchase a home and put your child’s name on the title and deed. However, if you’re financing it through a mortgage, the lender might require both of your names to be on the title, so be sure to explain your situation to your loan officer.
  

• What are the drawbacks of buying a house for my adult child?

  Depending on how you make the purchase, it can strain your personal finances. For instance, if you co-sign a mortgage and your child is unable to keep up with monthly payments, you’ll be on the hook for the debt. It could impact your credit score as well. And if you gift your child the money, or the property itself, you will likely owe the IRS gift taxes.